Dave IPO: Mark Cuban-Backed Fintech Tests SPAC Market
The SPAC Market: A Shift in Expectations
The surge in special purpose acquisition companies (SPACs) didn't unfold as anticipated by many within the technology and business sectors. Despite considerable optimism extending into early 2021, private companies opting for public listings through these blank-check entities have generally underperformed in subsequent periods.
Furthermore, SPACs haven't successfully brought a substantial number of unicorns and other highly valued private companies public. The growth rate of private unicorns continues to outpace the capacity of even a market stimulated by SPAC activity.
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However, the lack of disruption in the unicorn market doesn’t signify that blank-check companies have been without influence on the startup landscape. A significant number of SPAC ventures have encountered difficulties. For instance, Latch, a company TechCrunch discussed regarding its SPAC process, has experienced a dramatic decline in its share price, falling from a peak of $19.70 to $6.56 currently.
This represents a substantial loss, yet it’s not an isolated case among recent SPAC debuts. We’ve also observed SPAC transactions involving companies with questionable reputations. However, not all SPAC-backed companies are electric vehicle firms with transparency issues or social networks linked to individuals disconnected from reality.
SoFi serves as an example of a company that successfully went public via a SPAC and appears to be thriving. Today, Dave.com aims to emulate SoFi’s success, joining the ranks of fintech startups that achieved positive outcomes through SPAC mergers.
Dave.com: A Fintech Focused on Financial Inclusion
Dave is a consumer financial service dedicated to reducing banking fees for its users. Its core proposition, in essence, is that overdraft charges disproportionately affect lower-income individuals, and technology can facilitate a more equitable banking experience for all income levels.
From a corporate perspective, Dave is noteworthy. It raised a relatively modest amount of capital while remaining private – including investment from Mark Cuban – and has demonstrated a history of limited losses, adjusted profitability, and growth.
The company possessed the option of a traditional IPO, a distinction that sets it apart from many other SPAC debuts. We spoke with its CEO and co-founder, Jason Wilk, to discuss the decision to pursue a SPAC and the company’s future plans as a public entity.
We will begin by examining Dave’s latest financial data, then delve into the rationale behind its SPAC choice, and finally, consider its future prospects.
Dave's Financial Performance in Q3 2021
Data concerning Dave’s financial results for the third quarter of 2021 has been published and warrants examination.
The fintech company reported a collective 30% increase in revenue during the specified quarter. This growth was driven by a 22% rise in service revenue and a substantial 956% year-over-year expansion in transaction revenue.
Furthermore, Dave announced the acquisition of “approximately 1.56 million new members” during the period.
Maturing Banking Services
The company indicated that its banking services are progressing towards maturity. A full transition of all customers to Spending Account Members was scheduled for early 2022.
For clarity, Dave’s spending account functions as a “non-interest-bearing demand deposit account,” accessible both online and via a company-issued debit card.
Growth and IPO Potential
Considering Dave achieved nine-figure revenues in 2020, as detailed in its SPAC investor deck, the Q3 2021 growth rate represents a solid performance for a company pursuing a public offering.
Combined with a track record of positive EBITDA generation, the available data suggests Dave possessed the characteristics of a viable IPO candidate. This raises the question of why the company opted for a SPAC instead.
- Revenue Growth: 30% overall in Q3 2021.
- Service Revenue Increase: 22%
- Transaction Revenue Growth: 956% year-over-year.
- New Members: Approximately 1.56 million.
The company’s financial health, as demonstrated by these figures, positions it favorably within the fintech landscape.
IPO Alternatives
With the initial enthusiasm surrounding SPACs diminishing, it became apparent to us that these transactions generally fall into two distinct groups: those that would likely not have materialized through conventional means, and those where companies possessed alternative avenues for going public. Dave falls into the latter category.
What motivated Dave's decision to pursue a SPAC, then? Wilk explained that, being a relatively young company with limited prior funding, the upfront price discovery process was a significant consideration. Equally important was securing an anchor investor, Tier, and a guaranteed private investment in public equity (PIPE) commitment.
However, a complicating factor arose: the extended, several-month delay Dave experienced before the transaction could be finalized. Wilk attributed this to heightened scrutiny from the U.S. Securities and Exchange Commission, as these types of deals are now frequently subject to multiple rounds of feedback. In essence, Dave faced repercussions for being associated with the numerous less successful SPAC transactions of 2021.
Does Dave’s Chief Executive Officer now regret not following a similar path to Nubank, another neobank that achieved a successful initial public offering?
“Looking back, I believe the ideal scenario would have been to achieve the same upfront price discovery and guaranteed capital without the 'SPAC' label, simply because of the unwarranted negative perception that has developed around SPACs since we initially announced our combination last year,” Wilk stated, referencing the shift in sentiment towards SPACs.
While choosing the SPAC route may not have substantial long-term consequences for Dave, the company did have to navigate a delay in completing the merger. What caused this slowdown? According to Wilk, the SEC was simply “overloaded” with submissions. He added, “Certain companies seeking to go public… perhaps warranted more thorough review,” noting that the SEC’s questioning process for SPAC deals evolved from a single round to several.
This increased scrutiny and backlog meant a longer timeline for Dave to finalize its SPAC combination. Consequently, the company was unable to access the funds from the SPAC transaction until recently. This meant they were “relying on having several hundred million dollars in additional capital” at an earlier stage, as the CEO explained. This constraint impacted their growth during the latter half of 2021.
Wilk shared with The Exchange that his company “adjusted our growth projection to approximately 38% for 2021, compared to the 60% or 70% we had anticipated with the additional capital.”
However, these challenges are now in the past.
Dave's Future Trajectory
As keen followers of the fintech and neobank landscape, we've observed a trend towards comprehensive service offerings. However, Dave does not intend to emulate this "everything store" approach, according to Wilk. The company’s focus will remain on ensuring all additional services complement its core banking functionality.
Expansion Possibilities
We inquired with Wilk regarding potential expansion areas highlighted in the SPAC deck – namely, “investing” and “protecting.” He clarified that these were illustrative examples, but provided further insights.
Regarding “investing,” Wilk indicated a potential interest in cryptocurrency, acknowledging Dave’s focus on the future possibilities within this space. The company received investment from FTX, a crypto exchange, and is also exploring peer-to-peer transfers similar to those offered by Venmo. “Numerous applications could emerge from this in the future,” Wilk stated.
Focus on Insurance
Conversely, the “protecting” aspect is most likely to materialize as an insurance offering, representing a natural extension of Dave’s existing services. “We identified areas where our customer base, frequently experiencing overdrafts, is significantly overcharged for services,” Wilk explained. “Insurance, particularly for car and renters insurance, presents a substantial opportunity, as customers with lower credit scores often face inflated premiums.”
Insurance aligns well with Dave’s existing capabilities, stemming from its experience in loan underwriting and its access to valuable customer data. “We have insight into both insurance payments and loan obligations, providing a competitive advantage in offering more affordable options with guaranteed savings.”
Strategic Growth Options
Both “investing” and “protecting” were presented within a section of the SPAC deck concerning “future opportunities (incl. M&A).” This suggests Dave may pursue these avenues independently, through partnerships, or via strategic acquisitions. We will continue to monitor their progress.
Beyond Traditional Fintech
Dave’s Side Hustle, a gig economy job service, demonstrates the company’s willingness to explore offerings beyond conventional fintech solutions. Further innovative services may emerge from Dave in the future. Now that Dave is a public company, its performance will be readily accessible. We will provide further analysis following the earnings report!